Automated Trader's proprietary tradability metrics

Automated Trader’s proprietary tradability metrics are environmental statistics intended to assist those building trading models/systems in determining which markets and timeframes are most favourably responsive to which generic types of model.

Trend Alphability

The Alphability stats for determining the 'trend friendliness' of
markets shown here are based upon determining the amount of noise
around a hypothetical trend. The simplest variant of Trend
Alphability depicted here consists of the R2 (coefficient of
determination) of a linear regression line plotted through the
data points between the bars on which the low and high of a
trading session were made (or the reverse if the high was made
first). The calculation is based on the mid point of price bars
in a variety of time frames. Multiplying this daily Alphability
metric by the high/low range for the day (expressed as a
percentage change) gives a ratio of 'trendiness' to the maximum
available reward.

Reversal
Alphability

Reversal Alphability follows similar general principles to Trend
Alphability in that it provides a metric for the ease or
difficulty of capturing a hypothetically optimal alpha. As the
name implies, the differences lie in the generic types of model
used. The variant of Reversal Alphability shown here is based
upon two very simple reversal patterns, the short entry version
of which is illustrated in Figure 1. For a short position the
reversal entry logic is a bar (Bar 3) with a mid value greater
than the preceding and succeeding bars (vice versa for a long
entry).

To calculate the metric, the number of reversals in a day are
calculated and divided into the sum of the percentage change of
the moves from each reversal to the next. (Trend and Reversal
Alphability are not necessarily mutually exclusive; it is
perfectly possible for an instrument to have simultaneous
high/low scores for both.)

Figure 2: Daily Trend Alphability - top five Dow stocks

General Motors heads the top five Trend Alphability Dow stocks
for the second issue running. Unfortunately for GM shareholders,
since early May both intraday and daily trends have been pretty
much all one way - down. (As they have for all the other stocks
in this group.) Interestingly, the intraday trends among the Top
Five have as group been noticeably weaker in this issue than in
the previous one, when the overall picture was rather more
positive.

Figure 3: Daily Trend Alphability - bottom five Dow stocks

Another stellar performance from Johnson & Johnson, which in
terms of trending probably counts as clinically dead. A
particularly fine example of this was its extended flatline
period in late April and early May. Mind you, in the current
market environment, boring is the new sexy - unless of course
you're trying to build trend following models for Johnson &
Johnson.

Figure 4: Daily Trend Alphability - stock index futures

Overall, stock index futures were less trendy than in our
previous issue, markedly so in the case of the DAX. The one
obvious exception to this for all of them being the market
collapse on June 6th.

Figure 5: Daily Trend Alphability - bond futures

Bond futures were similarly less inclined to trend. However, one
interesting development was that for the first time the Long Gilt
displayed significantly greater tendency to trend than the Bund.
As usual, the T-Bond showed the strongest intraday trends
overall.

Figure 6: Daily Reversal Alphability - top five Dow stocks

For the first time ever, Automated Trader's top five Trend
Alphability Dow stocks are the same as the Reversal Alphability
Top 5. While AIG, Amex, JPM, Citi and GM showed strong trends and
volatility, there were clearly plenty of tradable reversal
signals within those trends.

Figure 7: Daily Reversal Alphability - bottom five Dow stocks

Another clean sweep for Johnson & Johnson, bringing a whole
new meaning to the word 'tedium'. Intraday volatility in the
stock is so depressed that even when it twitches spasmodically
from one reversal to the next there is minimal alpha to be
captured. However, the bottom five Reversal Alphability stocks
did as a group offer slightly more reversal trading opportunities
than in our previous issue.

Figure 8: Daily Reversal Alphability - stock index futures

A very notable shift this issue, with all stock index futures
proving far less amenable to reversal models. While the average
scores for both the DAX and FTSE declined appreciably, the
biggest fall was in the S & P Emini where the average
Reversal Alphability score for the period fell from 0.453 in our
previous issue to 0.256.

Figure 9: Daily Reversal Alphability - bond futures

A similar (though far less pronounced) shift in bond futures,
with the average Reversal Alphability scores for the period all
declining slightly.